So-called King Tides, urged on by climate change and brought about by the close alignment of the sun, the moon and the earth are already producing flooding in Miami 10 days a year.

Debate the cause if you want to expend more hot air denying science. But it’s a fact that resale values of coastal homes in Miami, Atlantic City and Norfolk, Va. are already starting to erode.

These bellwether locations signify a growing and alarming threat; that continually rising seas will damage coastal residential and commercial property values to the point that property owners will flee those markets in droves, thus precipitating a mortgage value collapse that could equal or exceed the mortgage crisis that rocked the global economy in 2008.

“Insurance deals with extreme weather and billions of dollars of losses, but what we are talking about is uninsured loss of fair market value that is trillions of dollars in losses and I am not talking about in 2100, I’m talking about the next mortgage cycle,” said Albert Slap, president of Coastal Risk Consulting, a Florida firm that provides lot by lot modeling of flood risk.

Models created by Coastal Risk Consulting show flooding rates of Miami properties are going to rise substantially between now and 2050, within that 30–year mortgage cycle he refers to.

Albert Slap, president, Coastal Risk Consulting

“The results of our modeling and that of NOAA and many others shows that the increase in flooding on people’s properties, due to astronomy and physics, not weather, is alarming and significant and in all likelihood is not backstopped by insurance,” Slap said.

Adding to the threat is that real estate agents and homeowners aren’t incentivized or required to reveal how frequently properties flood, or how exposed they are to flooding.

“Forty percent of Americans live on the coast, which means you have trillions of dollars at risk for climate change that hasn’t been modeled for default increases,” Slap said.

The Pew Charitable Trusts, as part of its testimony to Congress as the National Flood Insurance Program undergoes review, is asking that all homeowners be required to report on that risk.

Many coastal homes are backstopped by the NFIP, which is still billions in debt from its losses in the Katrina-Wilma-Rita hurricane cycle of 2005.

Private sector insurers are eyeing ways to write more flood business. But if the NFIP suffers further losses, and private sector insurers retreat, what then?

“If you look at it systematically, if a broad number of insurance companies decide that they need to triple homeowners insurance rates, or they need to pull out of a local market, that would create a lot of problems in terms of the value of the properties that are in that locale,” said Cynthia McHale, president of insurance for Ceres, a nonprofit that advocates for sustainable business practices.

In November, Sean Becketti, the chief economist for the economic and housing research group at Freddie Mac, the federally backed housing lender, co-authored a paper that documented this very risk.

The paper referenced the fact that daily high-water levels in Miami are increasing at a rate of an inch per year, much faster than the rate of global sea-level rise. Other cities along the Eastern seaboard are experiencing a 10-fold increase in the frequency of flooding, according to Freddie Mac.

“A large share of homeowners’ wealth is locked up in the equity in their homes,” Becketti wrote.

“If those homes become uninsurable and unmarketable, the values of the homes will plummet, perhaps to zero.”

“Forty percent of Americans live on the coast, which means you have trillions of dollars at risk for climate change that hasn’t been modeled for default increases.” —Albert Slap, president, Coastal Risk Consulting

In the housing crisis of 2008, according to Becketti, a significant percentage of borrowers continued to make their mortgage payments even though the value of their homes was less than their mortgages.

Cynthia McHale, president of insurance, Ceres

“It is less likely that borrowers will continue to make mortgage payments if their homes are literally underwater,” Becketti said.

“As a result, lenders, servicers and mortgage insurers are likely to suffer large losses,” he said.

Insurers would suffer, according to Ceres’ McHale, and not just as backers of insurance policies.

“Insurance companies themselves are major commercial and residential mortgage holders,” she said.

“They assume that the property is going to hold its value and act as collateral if needed. If it doesn’t hold its value, where is the collateral?”

“Not only will their mortgages be metaphorically underwater, they are going to be literally underwater,” said Slap.

“And there is no coming back from it.”

“The New York Times” published a piece in November that detailed the case of Roy and Carol Baker of Sarasota, Fla. The Bakers tried for months to sell their home in Siesta Key, according to the story, but buyers kept backing out when they discovered the annual flood insurance premium was about $7,000.

“This experience will become more common, economists say, as the federal government shifts away from subsidizing flood insurance rates to get premiums closer to reflecting the true market cost of the risk,” reporter Ian Urbina wrote in his piece.

The Climate Race

What Becketti, Slap and others say is true, said Helen Thompson, a director, commercial marketing at Esri, the mapping and analytics company that works with insurers and property owners.

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But she said there is a solution, the public and private sector working together to address the problem: That and about $4 trillion.

“The challenge for a lot of people is to understand the scope and the scale of this issue, and in some ways, like the mortgage bubble before, if you are ignorant of the problem, you can’t fix it,” she said.

“I think taking action means crafting a discussion of the problem and moderated expressions of what those solutions are, based on science and analysis and not hyperbole,” she said.

It’s well documented how dire the nation’s infrastructure needs are.

Thompson compares the current dilemma posed by climate change and sea rise in the U.S. and elsewhere to the cholera epidemic that ravaged London in the mid-19th century. What’s needed now, she said, is something akin to the massive public works projects that were undertaken to provide Londoners with cleaner drinking water.

“They realized the social and political cost of this,” Thompson said.

“We need to change our thinking to say this is not just about handing debt to our children, it’s about maintaining the same level of opportunity and quality of life for our children,” she said.

Thompson points to China, which she says is investing in climate change-resistant ports and additional infrastructure internationally to remain economically competitive.

“It’s in their best interests as a global manufacturing hub to mitigate the cost and the impact of climate change because of how much collateral damage it will do to their economies,” Thompson said.

Helen Thompson, director, commercial marketing, Esri

She said the U.S. needs to go down the same path, and step on it.

“I call it the ‘climate race,’ like the space race,” she said.

“The infrastructure needs to be created to deal with this, and the United States is massively lagging.”

Such a program would provide loans for sewage backflow preventers, changing the grade on a driveway, or elevating a home on a platform

Thompson said the massive infrastructure projects she envisions could include moving the vital container operations at the Port of Miami inland and constructing a berm to defend against sea water.

Office building owners in Lower Manhattan, which was so damaged by Superstorm Sandy, are increasingly investing in flood prevention barricades and moving critical building components like HVAC and plumbing components to higher floors.

Americans just got a chilling reminder of the dangers presented by changing weather patterns and crumbling infrastructure. Fears that the Oroville Dam on California’s Feather River would buckle under heavy rainfall got everyone’s attention.

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“People are looking at that and saying, ‘We didn’t realize what this change in weather patterns means in the long term,’ ” Thompson said, and they are relating the Oroville event to infrastructure in their own towns and the risks they present.

As the NFIP undergoes its annual review in Congress, Slap said administrators would do well to exclude King Tide events.

“If you were to go to NFIP and ask them if they cover King Tide flooding, they would say, ‘If it meets our definition of flood then we must cover it.’ This is a red flag, because what you are saying is the government and the taxpayers are covering sea level rise and that is not something we can afford,” Slap said. &

According to a survey conducted by The Hartford in Q2 2017, 80 percent of mid-to-large size companies in the U.S. are engaging in overseas business, ranging from executive travel all the way to manufacturing. Globalization and technology create opportunities to tap into new markets, and companies that don’t take advantage of those opportunities risk losing out to competitors that do.

“Eighty percent of mid-size companies have some type of international exposure, and we expect that these companies will only continue to increase their international activities going forward,” said Alfred Bergbauer, Vice President and Head of Multinational Underwriting, The Hartford.

Most mid-sized companies address their international exposure via a global master policy, which is issued in the U.S. and provides blanket terms and conditions to all of an insured’s operations, including those outside the U.S. Buyers may believe it fully covers any exposures faced abroad, but a U.S. global master policy may not operate as traditional local insurance would. For example, it may not be recognized by a local regulator and may be inconsistent with local law. Thus, the performance of the insurance may not be in line with the insured’s expectations of how the policy should perform in the event of a loss or where a certificate of insurance is required.

As a result, the U.S. issuing carrier may not be able to respond to a loss arising at an insured’s facility outside the U.S. as the insured might expect, and payments or reimbursements made to the insured resulting from that policy could carry significant tax penalties or fees.

“A U.S. contract cannot bend the rules and regulations of a sovereign nation,” Bergbauer said. “A U.S. master policy may be inconsistent with local insurance terms and conditions, norms and practice and thus cannot always address local country risk needs as a local policy issued in that country would. For risks located outside the U.S., such as risks arising from operations in other countries, master policies should be paired with coordinated, locally issued insurance policies.”

Brokers and buyers unaware of the specialized insurance structures required to legally transact business abroad could face the following three unintended consequences:

1. If the insured suffers a loss, they might not be indemnified.

Alfred Bergbauer, head of Multinational Insurance

Domestically, U.S. companies have very clear expectations for their insurers. If the insured suffers a compensable loss, they want their carrier to pay the claim ―whether it’s first- or third-party― and hire counsel to represent them if necessary. In other words, they expect full indemnity.

But this basic expectation for indemnification is not automatic in foreign countries. If an insured does not have a local policy and suffers a loss, an expedient claims payment may not always occur.

That is, “Without a local policy, the U.S. policy may not behave as the customer would expect it to,” Bergbauer said. “For example, in some countries, it may be more difficult to hire counsel, to utilize a claim adjuster to pay a local third party, and crucially, pay the insured’s local operation which suffered the loss.”

2. Claims payments could be subject to U.S. taxes.

If an insured has only a U.S. master policy, the insured’s foreign operation would be responsible for covering the loss in the foreign country and the U.S. insured would then seek reimbursement from its insurer in the U.S.

However, a claim payment made in the U.S. to cover a loss suffered by foreign entity is considered a taxable event in the eyes of the IRS.

“The IRS takes the view that the insured has no loss to offset against this payment, resulting in the payment being taxable at the U.S. corporate income tax rate —currently 21 percent,” Bergbauer said.

“It can be a very uncomfortable situation if the broker or insured were unaware of that dynamic.”

Getting hit with such a significant and unexpected tax leaves the insured short of the funds needed to recover from a loss, and threatens the trust placed in their broker to educate them about this exposure.

3. Failure to obtain insurance from a local carrier exposes the insured to many risks.

If an insured’s local operations are required to obtain property or liability cover from a local insurer either by local law or because the local operations need to provide certificates of coverage from local insurers, insurance provided by a U.S. insurer may not address these requirements.

“If the local regulator finds evidence that a local operation does not have insurance provided by a local carrier where it is required to do so, it can issue penalties against both the broker and the policyholder,” Bergbauer said. “China, for example, has issued penalties for unlicensed insurance equal to five times the amount of the illegal claim payment.”

Beyond a sizable bill, such companies also stand to take a hit to their reputations.

“You want to be viewed as an upstanding corporate citizen in the markets where you operate.” Bergbauer said.

“If a local newspaper calls you out for breaking the law, it can be tough to recover from.”

An Intensifying Exposure

All of the above risks stem from relying on a Global Master Insurance policy which does not leverage locally admitted policies. The risks associated with covering risks arising from foreign operations without local policies have always existed, but they have flown under brokers’ radar because enforcement of local insurance laws was relatively lax.

That is no longer the case.

Today, ministries of finance and regulatory authorities have started collaborating across borders to share information about foreign investment trends and audits conducted on foreign firms, even entering multilateral agreements to identify violators of insurance law.

“They look for the most egregious offenders and make examples of them,” Bergbauer said.

In light of the enforcement crackdown, multinational companies can ill afford to be uninformed of their international insurance risks or the solutions available to address them. Sophisticated brokers in the U.S. may be experts on domestic regulatory requirements, but too often they lack knowledge of varying rules and regulations outside our borders, and of the solutions available to fulfill them.

“Most companies with international exposures are never approached by their broker to discuss those risks and delve into the best way to insure them,” Bergbauer said.

“Brokers do not spend enough time discussing the extent of their customers’ international activities, or how their policies will respond to them. So we’re going out to our broker network and teaching them how to have this conversation.”

Keys to Compliance: Education and the Controlled Master Program

Through seminars, informational bulletins and one-on-one conversations, The Hartford is reaching out to agents and brokers to make education and awareness of regulatory risk a priority. And it offers a solution to fill in the gaps where a global master policy may fall short of local standards: a Controlled Master Program, or CMP.

The Controlled Master Program differs from a Global Master Policy in a few important ways. Primarily, it allows for the placement of locally-issued admitted policies along with a U.S. master policy, while keeping the administration, claims and risk control services consolidated with one single carrier.

This means clients have a single point of contact, no matter where they have insurable assets or where they incur a loss. A comprehensive global program administered by a single carrier presents the most streamlined and efficient way to address risk exposures arising out of international activity.

The Hartford leverages its global network infrastructure — spanning 150 countries around the globe — to identify where admitted insurance is required and then places good local standard policies in compliance with local regulations. By taking a holistic underwriting approach to the entirety of a company’s exposures, the negative consequences outline above can be avoided. The CMP offers the benefits of cost efficiency, claims consistency, an increased level of control for the buyer, and better regulatory compliance.

“The Hartford’s Controlled Master Program provides the coverage that you expect in the U.S., wherever you have exposure. Alignment among underwriting, risk control services and claims guarantee consistent loss response and level of service across the board,” Bergbauer said.

Perhaps most importantly, The Hartford’s proactive outreach ensures brokers are equipped to discuss and address their clients’ international exposures, helping ensure they don’t have to learn the consequences of providing coverage without local policies the hard way.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with The Hartford. The editorial staff of Risk & Insurance had no role in its preparation.

The Hartford is a leader in property and casualty insurance, group benefits and mutual funds. With more than 200 years of expertise, The Hartford is widely recognized for its service excellence, sustainability practices, trust and integrity.

Faced with a shortfall of as many as two million workers between now and 2025, the sector needs to either reinvent itself by making it a more attractive career choice for college and high school graduates or face extinction. It also needs to shed its image as a dull, unfashionable place to work, where employees are stuck in dead-end repetitive jobs.

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Added to that are the multiple risks caused by the increasing use of automation, sensors and collaborative robots (cobots) in the manufacturing process, including product defects and worker injuries. That’s not to mention the increased exposure to cyber attacks as manufacturers and their facilities become more globally interconnected through the use of smart technology.

If the industry wishes to continue to move forward at its current rapid pace, then manufacturers need to work with schools, governments and the community to provide educational outreach and apprenticeship programs. They must change the perception of the industry and attract new talent. They also need to understand and to mitigate the risks presented by the increased use of technology in the manufacturing process.

“Loss of knowledge due to movement of experienced workers, negative perception of the manufacturing industry and shortages of STEM (science, technology, engineering and math) and skilled production workers are driving the talent gap,” said Ben Dollar, principal, Deloitte Consulting.

The Talent Gap

Manufacturing companies are rapidly expanding. With too few skilled workers coming in to fill newly created positions, the talent gap is widening. That has been exacerbated by the gradual drain of knowledge and expertise as baby boomers retire and a decline in technical education programs in public high schools.

Ben Dollar, principal, Deloitte Consulting

“Most of the millennials want to work for an Amazon, Google or Yahoo, because they seem like fun places to work and there’s a real sense of community involvement,” said Dan Holden, manager of corporate risk and insurance, Daimler Trucks North America. “In contrast, the manufacturing industry represents the ‘old school’ where your father and grandfather used to work.

“But nothing could be further from the truth: We offer almost limitless opportunities in engineering and IT, working in fields such as electric cars and autonomous driving.”

To dispel this myth, Holden said Daimler’s Educational Outreach Program assists qualified organizations that support public high school educational programs in STEM, CTE (career technical education) and skilled trades’ career development.

It also runs weeklong technology schools in its manufacturing facilities to encourage students to consider manufacturing as a vocation, he said.

“It’s all essentially a way of introducing ourselves to the younger generation and to present them with an alternative and rewarding career choice,” he said. “It also gives us the opportunity to get across the message that just because we make heavy duty equipment doesn’t mean we can’t be a fun and educational place to work.”

Rise of the Cobot

Automation undoubtedly helps manufacturers increase output and improve efficiency by streamlining production lines. But it’s fraught with its own set of risks, including technical failure, a compromised manufacturing process or worse — shutting down entire assembly lines.

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More technologically advanced machines also require more skilled workers to operate and maintain them. Their absence can in turn hinder the development of new manufacturing products and processes.

Christina Villena, vice president of risk solutions, The Hanover Insurance Group, said the main risk of using cobots is bodily injury to their human coworkers. These cobots are robots that share a physical workspace and interact with humans. To overcome the problem of potential injury, Villena said, cobots are placed in safety cages or use force-limited technology to prevent hazardous contact.

“With advancements in technology, such as the Cloud, there are going to be a host of cyber and other risks associated with them.” — David Carlson, U.S. manufacturing and automobile practice leader, Marsh

“Technology must be in place to prevent cobots from exerting excessive force against a human or exposing them to hazardous tools or chemicals,” she said. “Traditional robots operate within a safety cage to prevent dangerous contact. Failure or absence of these guards has led to injuries and even fatalities.”

The increasing use of interconnected devices and the Cloud to control and collect data from industrial control systems can also leave manufacturers exposed to hacking, said David Carlson, Marsh’s U.S. manufacturing and automobile practice leader. Given the relatively new nature of cyber as a risk, however, he said coverage is still a gray area that must be assessed further.

“With advancements in technology, such as the Cloud, there are going to be a host of cyber and other risks associated with them,” he said. “Therefore, companies need to think beyond the traditional risks, such as workers’ compensation and product liability.”

Another threat, said Bill Spiers, vice president, risk control consulting practice leader, Lockton Companies, is any malfunction of the software used to operate cobots. Then there is the machine not being able to cope with the increased workload when production is ramped up, he said.

“If your software goes wrong, it can stop the machine working or indeed the whole manufacturing process,” he said. “[Or] you might have a worker who is paid by how much they can produce in an hour who decides to turn up the dial, causing the machine to go into overdrive and malfunction.”

Potential Solutions

Spiers said risk managers need to produce a heatmap of their potential exposures in the workplace attached to the use of cobots in the manufacturing process, including safety and business interruption. This can also extend to cyber liability, he said.

“You need to understand the risk, if it’s controllable and, indeed, if it’s insurable,” he said. “By carrying out a full risk assessment, you can determine all of the relevant issues and prioritize them accordingly.”

By using collective learning to understand these issues, Joseph Mayo, president, JW Mayo Consulting, said companies can improve their safety and manufacturing processes.

“Companies need to work collaboratively as an industry to understand this new technology and the problems associated with it.” — Joseph Mayo, president, JW Mayo Consulting

“Companies need to work collaboratively as an industry to understand this new technology and the problems associated with it,” Mayo said. “They can also use detective controls to anticipate these issues and react accordingly by ensuring they have the appropriate controls and coverage in place to deal with them.”

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Manufacturing risks today extend beyond traditional coverage, like workers’ compensation, property, equipment breakdown, automobile, general liability and business interruption, to new risks, such as cyber liability.

It’s key to use a specialized broker and carrier with extensive knowledge and experience of the industry’s unique risks.

Stacie Graham, senior vice president and general manager, Liberty Mutual’s national insurance central division, said there are five key steps companies need to take to protect themselves and their employees against these risks. They include teaching them how to use the equipment properly, maintaining the same high quality of product and having a back-up location, as well as having the right contractual insurance policy language in place and plugging any potential coverage gaps.

“Risk managers need to work closely with their broker and carrier to make sure that they have the right contractual controls in place,” she said. “Secondly, they need to carry out on-site visits to make sure that they have the right safety practices and to identify the potential claims that they need to mitigate against.” &

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]